A Potential Path? Exploring a Strategy Between Defence and Trade in a Way That Enhances Canadian Sovereignty

June 5, 2025 – A new working paper from the C.D. Howe Institute suggests that Canada could leverage increased defence spending and targeted US procurement commitments to help restore tariff-free trade in a manner that can reinforce national sovereignty. The paper outlines how a time-bound alignment of defence and trade policy could offer Canada renewed negotiating strength and bolster its military capabilities to address escalating economic and geopolitical pressures.

In “Guns for Butter: A Continental Pact for Security and Prosperity,” James Pierlot presents a policy scenario in which increased defence spending, coupled with greater procurement of US equipment and technology that enhances Canadian sovereignty and supports mutual defence objectives, could strategically reset Canada–US trade relations.

“This isn’t about arm-twisting or surrendering sovereignty,” said Pierlot. “In a world where trade and security are increasingly entangled, Canada may need to consider more coordinated strategies to protect both. While keeping trade and defence on separate tracks is preferable, this paper explores what it might mean to use enhanced defence credibility and procurement as levers to stabilize trade and strengthen Canada’s autonomy, security and role as a reliable ally.”

Pierlot notes that Canada currently spends just 1.4 percent of GDP on defence, which is below NATO’s 2 percent target and US expectations. At the same time, US tariffs and Canadian countermeasures could place around $1 trillion of Canadian output at risk over the next five years. His analysis explores an increase in defence spending to 3 percent of GDP by 2030. Of this increase ($148 billion over five years), 30 percent ($44 billion) would be directed to US procurement. This could help reset the conversation by addressing two key US concerns: underperformance on defence and a perceived trade imbalance.

As Pierlot notes, US-reported military sales to Canada totalled less than US$15 billion from 1950 to 2022 —modest by alliance standards despite recent large purchases and largely episodic. A predictable and transparent allocation of future Canadian defence spending to US suppliers, he argues, would represent a significant shift and signal deeper strategic alignment. The working paper also shows how different five-year defence-spending targets ranging from 2 percent to 4 percent of GDP could affect both Canada’s fiscal burden and its negotiating leverage.

While Pierlot acknowledges that trade and defence are traditionally managed on separate tracks, he argues that today’s geopolitical environment may require a more pragmatic, integrated approach as a necessary step, prefacing a return to a more stable, rules-based approach. He notes that historical agreements – such as the 1940 Ogdensburg Declaration and subsequent Hyde Park Agreement – created durable linkages between security and industrial cooperation, illustrating that coordination across these domains is not novel.

Pierlot observes that while past frameworks supported greater production in Canada, the proposed approach would commit to a portion of new spending going towards US production. He noted that a strong, concurrent commitment to building domestic defence production capacity will be essential to ensure the arrangement benefits Canada and has public support.

The paper also outlines measures to protect Canadian interests, including directing most new spending toward domestic procurement and Arctic readiness, tying US procurement to greater Canadian oversight and autonomy within joint systems such as NORAD, and a five-year review to evaluate progress and ensure continuing alignment with Canada’s national interests and priorities.

“Recent developments have put a spotlight on Canadian sovereignty; specifically, how we can protect it amid shifting expectations,” Pierlot said. “If both countries are asking, ‘What do we want from this relationship?’ then it’s prudent to explore a path that connects our mutual interests in defence and trade.”

Read the Full Report

For more information, contact: James Pierlot, Principal, Pierlot Pension Law, and Founder and Chief Executive Officer, Blue Pier; Percy Sherwood, Associate Editor and Communications Officer, C.D. Howe Institute, 416-407-4798, psherwood@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

Want more insights like this? Subscribe to our newsletter for the latest research and expert commentary.